Real assets shine as market dynamics change

Real assets make particular sense in a world where the inverse correlation between stocks and bonds is diminishing, says Michelle Butler, senior vice-president and portfolio specialist with Cohen & Steers.

Speaking on the latest episodes of the Soundbites podcast, Butler said an allocation to natural resource equities, infrastructure, real estate, and commodities would help diversify portfolios that can no longer count on equities and fixed income for that diversification.

“There’s a significant amount of interest that we’ve seen in real assets, in particular over the last three to four years, since we entered this new market regime where inflation has been elevated, where we’ve seen interest rates elevated … and where diversification has mattered more,” she said.

“In the prior disinflationary regime, you didn’t need to be very diversified because the correlations between stocks and bonds were very low,” she added. “However, today they’re exceptionally elevated.”

According to Butler, the correlation between stocks and bonds was moderately positive in the late 20th Century. From 2003 to 2020, that correlation disappeared, hitting a low of minus 0.6 when Covid hit. Post-Covid, and continuing to today, stocks and bonds have been especially correlated, in the positive 0.75 range.

“We’ve seen this upward trend, this rising stock:bond correlation — looking at equities and fixed income, specifically the MSCI World and U.S. Treasuries — for the better part of three years,” she said. “Meaning that if you are heavily exposed to just stocks and bonds in your overall asset allocation design, you’re likely not diversified enough.”

Given the volatility of today’s markets, the greater inflationary risk and the geopolitical uncertainty, diversification is more important than ever.

“Maintaining inflation beta and staying diversified is key,” she said. “And that has led to increased interest on the part of investors — across both the institutional and the wealth management retail space — [for] real assets to ensure they have that diversification and those diversified return levers within a portfolio.”

Butler said real assets have performed well this year.

“Generally, real assets are up around 9% year to date, outperforming global equities, which are up about 7%,” she said.

Within the category of real assets, natural resource equities are up about 12% this year, infrastructure about 9%, global real estate is up about 7%, and commodities around 6%.

“And of course, I’d be remiss if I didn’t mention gold, which is a real asset. Gold is up 26% year to date,” she said.

The outlook for real assets for the balance of 2025 and into 2026 remains constructive, she said.

“We believe the macro backdrop is quite attractive,” she said. “Specifically, we still remain in an elevated, inflationary market that tends to be an environment where real assets perform quite well.”

She described the current moment as “an era of scarcity” where macro economic trends conspire to challenge supply chains. Among the prevailing conditions:

• inflation is likely to remain elevated;
• there is increased risk of negative supply shocks;
• increased commodity investment has led to undersupply in many markets;
• geopolitical uncertainty is the norm; and
• an emphasis on fiscal dominance across the globe, with rising debt levels that put pressure on central banks to lower interest rates.

“That’s an environment, that’s an era of scarcity that tends to favour real assets,” she said, “where the diversification, the inflation sensitivity, and the equity-like returns that real assets provide tend to be very attractive to investors.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.